As the Baby Boomers have grown older, the time has come for many children of this generation to start looking into their parents’ finances. Most people will wind up taking over their parents’ finances at some point and it’s important to understand how to optimize their savings by obtaining tax deductions from their parents’ medical bills.
Switching Your Parents from an IRA to a Roth IRA
In 2017, all ages will have an itemized deduction for their medical expenses if they exceed 10% of their annual gross income (AGI). For example, if you have an AGI of $50,000 and you had over $7,500 in medical expenses, you could qualify for a $3,750 itemized deduction for your taxes.
With age, people tend to have a lower AGI and more onerous medical bills; this leads many children to have a negative taxable income for their parents (AGI is $40,000 but medical expenses are $65,000). However, if children don’t invest correctly, they could be losing out on money even if they aren’t paying taxes. Since the excessive $15,000 won’t roll over onto the next year, you could pay taxes for one year and not for the next.
If they meet all requirements, switching your parents to a Roth IRA could help with children having a tax free retirement savings. Taking that $15,000 and putting it into a Roth IRA, where it will incur no taxes, helps with maximizing the amount of wealth for the owner and the eventual beneficiary of the IRA (children).
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